Introduction
Cross-border payments are those made between separate countries. Cross-border payments are essential for people, companies, industries, and international aid agencies. However, cross-border transactions are frequently inconvenient due to the exorbitant fees and protracted processing times involved.
The global economy will benefit from using blockchain technology for cross-border payments. Blockchain technology is a game-changer for international money transactions. When processing payments, banks view international transactions as riskier than domestic ones.
The process is highly expensive in order to avoid such risk and assure smooth transactions because there are so many parties engaged in money transfers from one nation to another, all of which demand fees for their services, regulatory costs, and FX fees to convert one currency into another. We will examine the current cross-border payments system and how blockchain technology is quicker and more effective in this article
How Do Payments Across Borders Operate?
The basic idea behind cross-border payments is straightforward. Let’s use an online store as an example. Create a checkout page for your website where you can provide your clients with a range of payment alternatives. Customers can frequently choose their chosen payment option while making purchases and finish the transaction after completing some kind of identity verification. The situation is significantly more complicated in the back. Currency conversion is frequently part of international payment processing. This calls for the management of each currency’s bank accounts, taxes, and foreign transaction fees by retailers. When customers use credit or debit cards to make payments, interbank fees are also charged.
Of course, you want to choose a payment method that appeals to your target market. For example, credit and debit cards for customers in North America and Latin America, and digital wallets for customers in Europe and Asia Pacific. Regardless of the payment methods set up by the merchant, they must appear in the technical connection of the payment processing gateway.
Bank transfers, credit card payments, and alternative payment methods like E-Wallet’s and mobile payments are among the most common methods of cross-border payment.
Challenges of cross-border payment
High Cost
cross-border payments are well-known for being prohibitively expensive. In addition, fees for foreign exchange (FX) conversions and regulatory costs add up.
Slow transactions
Cross-border payments made through a conventional bank transfer typically take between two and five days to process. Again, this is because a single transaction involves so many different entities. Due to the lengthy procedure involved, cross-border payments frequently experience delays.
Security issues
There is no guarantee that a bank will be able to retrieve the stolen funds in the event that a hacker is successful in stealing money from a cross-border payment pathway. These kinds of losses can be very expensive. Since each nation has its own laws, the cross-border payment system is vulnerable to hacking whenever money enters a nation with weak access controls and security measures.
Lack of transparency
Traditional cross-border payments lack complete transparency regarding fees, tracking, and currency conversion rates, which is a major drawback. Fees and transfer times are not known when a payment is made. When there are delays, it tends to be harder for finance teams to find out where payments are.
How Blockchain functions in international payments
Banks and payment processors have started to take steps to overcome the challenges posed by supporting cross-border transactions. Indian banks have embraced blockchain technology to improve the payment experience for its consumers. Consider the previous year.
The use of a bank’s more efficient cross-border payment service and a reduction in a customer’s reliance on expensive hawala brokers can both be facilitated by blockchain technology. It can also promote more financial literacy among Indians.
The idea of Blockchain technology offers a lot of promise for the future of cross-border payments due to the usage of encrypted distributed ledgers that provide trustworthy real-time verification of transactions without the need for intermediaries like correspondent banks.
It makes it possible to verify without relying on third parties. However, because anyone can use the technology to integrate their product to their advantage, the banking concept will not be eradicated by the technology. This technology is already being used by some banks in Japan and Korea for their payment transactions.
Advantage of Blockchain in Cross-Border payments
Faster settlement
Blockchain payments are completed in close to real time – in seconds rather than days. The ability to transfer money instantaneously helps businesses be more agile and responsive, taking action on new projects or addressing customer needs without waiting for funding to come through.
Cost-Effective
In order to complete the transaction, banks must enlist the assistance of intermediary banks. As frequently, banks don’t have a partnership with the bank in the other country. The sender and the beneficiary split the cost of the third party in between by charging a fee. The transaction fee will only apply to the blockchain network operator when cross-border payments are made using a blockchain network.
Enhanced Security
Everyone has a private key, just like in the cryptocurrency network. The key serves as a digital signature, and the system can be hacked for any reason. The signature itself will lose its validity. The blockchain is synced simultaneously, as is known. As a result, an attacker would be unable to quickly gain access to the data across multiple computers.
Transparency
Blockchain makes it less likely that record keeping will be inconsistent. It is a decentralized ledger that provides all authorized users with access to a verifiable and irreversible record of every transaction. Financial records are not maintained by a computer or central institution. The ledger is maintained and updated collectively by a collection of linked computers, and each participant has an identical copy.
Conclusion
Due to various flaws in old techniques, the use of blockchain in cross-border payments is growing by the day. The use of blockchain as an intermediate technology for cross-border payments is a big advantage. Combining blockchain technology with cross-border payments benefits both the sender and the recipient. As the globe becomes more globalized, the demand for a reliable cross-border transaction system grows. And cryptocurrencies appear to be the ideal answer. While banks can begin to cut transaction prices in order to compete with crypto transaction systems, the immutability and security provided by blockchain are superior to traditional institutions. Blockchain technology will have a significant influence on the structure of cross-border payments. As there is a gradual awakening, it might be a technical breakthrough.
Sources
SimplyFI Blog 